An Overview of ACH Payments: What it is and How it Works
Overview
Managing business payments efficiently is crucial for maintaining a healthy cash flow and fostering strong vendor relationships. Automated Clearing House (ACH) payments offer a dependable and cost-effective method for transferring money electronically between U.S. bank accounts.
While many businesses still rely on checks or wires, these manual, outdated methods often create unnecessary friction and increase the risk of errors or delays. When combined with broader accounts payable (AP) automation, ACH payments deliver speed, accuracy, and greater control —, particularly when handling recurring or high-volume transactions.
In this guide, you’ll learn how ACH payments work, their advantages over traditional methods, and how solutions like MineralTree can help you implement and scale ACH with confidence.
Key takeaways
- ACH payments are a fast, secure, and cost-effective way to transfer funds between U.S. bank accounts for payroll, vendor payments, and recurring billing.
- There are two types of ACH transactions: debits (pulling funds) and credits (pushing funds), each serving different business needs.
- Automation tools like MineralTree streamline ACH setup and execution through ERP integration, fraud prevention, and end-to-end AP management.
What are ACH payments?
ACH payments are electronic transactions that transfer money between U.S. bank accounts through the Automated Clearing House network. Regulated by the National Automated Clearing House Association (Nacha), this network enables the secure processing of payments in batches — unlike wire transfers, which are processed individually in real time.
ACH payments are widely used across various industries. Some common use cases include:
- Payroll: Employers use ACH to deposit salaries directly into employee accounts, reducing payment friction.
- B2B payments: Businesses often use ACH to pay invoices from vendors and suppliers.
- Recurring billing: ACH makes it easy for utility companies or other entities to collect monthly bills via direct debit.
Because the ACH system operates on a batch processing model, it offers efficiency at scale, particularly for recurring or high-volume transactions. These transactions are scheduled, tracked, and automatically reconciled, making ACH a preferred method for finance teams.
How do ACH payments work?
The ACH payment process involves five primary steps that ensure the secure and timely movement of funds from one account to another. Let’s take a closer look at each step below:
Authorization
Every ACH transaction starts with proper authorization. For businesses, this could mean having a customer sign a digital form agreeing to have their bank account debited for recurring payments, or a vendor submitting bank information with permission to receive payments via ACH. Without authorization, businesses cannot legally initiate a transfer of funds.
Authorization serves as a key safeguard against fraud, and to maintain compliance with banking regulations. It’s essential to store and manage authorization documentation securely, as you may need it to resolve disputes or audits.
Initiation
Once authorization is in place, the business submits a request to its bank, referred to as the Originating Depository Financial Institution (ODFI). This bank packages the transaction data and prepares it for transmission through the ACH network.
Depending on the setup, the request might be initiated manually via a bank’s online portal or automatically through integrated AP software that can pull data directly from your accounting or ERP system.
Batching
ACH is a batch system, meaning thousands of transactions are grouped before processing. The ODFI groups your payment with others and submits it to the ACH operator, which can be either the Federal Reserve or a private operator, such as The Clearing House (TCH). Batching helps reduce costs and increase processing efficiency — a key reason why ACH payments are more affordable than wire transfers.
Processing
The ACH operator then sorts through the batch, determines which transactions go where, and forwards them to the appropriate Receiving Depository Financial Institutions (RDFIs). These are the banks where the recipients — vendors, employees, or customers — hold their accounts.
The processing stage typically occurs several times per day, enabling both next-day and same-day ACH transactions, depending on the payment’s urgency.
Settlement
Finally, funds are moved between the ODFI and RDFI, and the recipient’s bank account is credited. Settlement usually takes 1–2 business days, though same-day ACH is available for eligible transactions. Once funds are settled, businesses can confirm the transfer via their payment dashboard or ERP system.
What are the benefits of ACH payments?
ACH payments offer distinct advantages over checks, wire transfers, and card-based transactions. For businesses managing high volumes of payments, the difference can be significant. These benefits can include:
- Lower transaction costs
- Greater automation and efficiency
- Better cash flow control
- Enhanced security and fraud prevention
- Improved traceability
Lower transaction costs
ACH payments are far more affordable than wire transfers or credit card transactions. A typical ACH payment costs between $0.20 and $1.50, whereas wire transfers generally range from $20–$30 per transaction, and credit card processing fees can reach 2–3% of the transaction amount.
These savings can add up quickly, especially for mid-market companies and enterprises processing thousands of payments per month.
Greater automation and efficiency
ACH payments integrate seamlessly with AP automation solutions, allowing businesses to streamline invoice approvals, batch payments, and reconciliation. This reduces manual data entry, minimizes errors, and shortens payment cycles.
If you use AP automation software, your business can automate the entire AP process, from invoice capture to payment, ensuring that ACH transactions are faster and more reliable.
Better cash flow control
ACH payments can be scheduled in advance, allowing businesses to time disbursements to align with their cash inflows. With enhanced predictability, finance teams can plan more effectively, avoid late payment penalties, and optimize their working capital.
For example, when comparing ACH vs. checks, ACH provides reliable payment timing and guaranteed funds clearance, whereas checks depend on physical mailing or manual processing.
Enhanced security and fraud prevention
ACH payments reduce exposure to check fraud, which remains one of the most common forms of payment fraud. Because ACH transactions are digital and encrypted, they’re inherently more secure.
Paired with protections like multi-factor authentication, clear user permissions, and automated fraud detection, ACH payments can help protect your business from unauthorized access and data breaches.
Improved traceability
Each ACH transaction provides a digital audit trail, simplifying reconciliation and reporting. This is particularly valuable for growing businesses that need to meet compliance requirements or prepare for financial audits.
Types of ACH payments: ACH debit vs. ACH credit
ACH debit and ACH credit are convenient digital payment options that can help you maximize efficiency and control in the payment process. Understanding the key differences between the two types of ACH payments is essential for choosing the best strategy for your business needs.
ACH debit
ACH debit transactions allow the recipient to pull funds from the payer’s account. This method is commonly used for recurring payments, such as subscriptions, utility bills, and insurance premiums.
Once the payer provides authorization, the payment is automatically withdrawn at scheduled intervals. For businesses with recurring billing models, ACH debit provides consistency, reduces late fees, and simplifies the collection process.
ACH credit
ACH credit transactions allow the payer to push funds to the recipient. This is frequently used for payroll, contractor payments, and vendor disbursements. The payer controls the amount and timing of the transaction, making it ideal for companies that want to schedule payments in line with their internal cash flow cycles.
ACH credit is particularly beneficial for businesses with complex approval workflows, as payments can be released after multi-tier sign-offs through an AP automation tool.
How to set up ACH payments for your business
Setting up ACH payments to pay your vendors is simpler than you may think. Here are four steps to get started:
- Choose an ACH processor
- Onboard applicable vendors
- Verify information is properly formatted
- Send to underwriter for processing
1. Choose an ACH processor
Start by selecting a provider that supports ACH transactions. This could be your bank or AP automation platform. Ensure the provider is Nacha-compliant and offers encryption protocols to secure payment data.
2. Onboard applicable vendors
Next, invite your vendors to accept ACH payments. You’ll need to collect each vendor’s routing and account numbers, as well as obtain authorization.
Your AP automation platform should allow you to automate this onboarding process by sending secure forms and tracking completion. Vendor participation is crucial, so consider offering incentives or highlighting the benefits (such as faster payments) to encourage adoption.
3. Verify information is properly formatted
Incorrect data is a leading cause of failed ACH payments. Use tools or software that validates routing numbers and flags formatting errors before submission. For high-volume operations, consider batch-importing vendor details into your ERP or payment platform.
Did you know? MineralTree offers built-in verification to ensure all bank details comply with Nacha formatting standards Nacha formatting standards.
4. Send to underwriter for processing
Most ACH processors require a one-time underwriting process, which involves evaluating your business for risk, confirming legal structure, and reviewing your typical transaction volume. Once approved, your ACH account will be live, and you’ll be ready to initiate payments.
Real-world use cases for improving ACH payments with MineralTree
House of Cheatham unlocks better control with MineralTree
House of Cheatham, a long-standing manufacturer of personal and beauty care products, faced significant challenges with its manual AP processes. Relying heavily on paper invoices and checks, the company struggled with time-consuming tasks, limited visibility into invoice statuses, and potential risks associated with manual errors.
By adopting MineralTree, House of Cheatham digitized its AP workflow starting with a dedicated AP email to receive invoices electronically. This enabled automatic capture and coding, while streamlining the entire process with clearly defined approval workflows.
Key outcomes:
- Decreased time spent on weekly payment runs by 98% — from six hours to just five minutes
- Freed up nearly 20 hours a week for the AP team to focus on strategic work
- Strengthened vendor relationships through faster, more predictable payments
- Reduced fraud risk and improved data accuracy with fewer manual touchpoints
Healthcare practice management company streamlines AP process
A rapidly expanding healthcare practice management company specializing in pediatric dental, vision, and orthodontic services faced significant challenges due to manual AP processes.
With operations spanning over 35 legal entities across seven states, the company faced an overwhelming volume of vendor invoices, complex financial workflows, and siloed payment information, resulting in time-consuming tasks and frequent errors.
To address these issues, the company implemented MineralTree’s TotalAP solution, which seamlessly integrated with its new Sage Intacct ERP system. This streamlined its end-to-end accounts payable process from invoice receipt through vendor payment, greatly improving efficiency.
Key outcomes:
- Achieved approximately 20% time savings for staff accountants
- Reduced quarterly close time by 67%, from 30 to 10 days
- Improved team productivity by reallocating two full-time employees to higher-value tasks
Enhance ACH payments with MineralTree
MineralTree transforms the ACH payment experience by delivering end-to-end automation, from invoice capture to payment execution. By integrating seamlessly with leading ERP systems like NetSuite, Sage Intacct, and Microsoft Dynamics, MineralTree ensures smooth data flow and eliminates manual entry.
Payments are executed securely and in full compliance with financial regulations, while real-time dashboards provide clear insights into payment status and cash flow.
Explore MineralTree’s Total AP solution to see how your business can unlock the full power of automated ACH payments.
Related ACH payment resources
ACH payments FAQs
What are common uses for ACH payments?
ACH is used for payroll, vendor payments, tax refunds, subscription billing, government disbursements, and more. Its versatility makes it suitable for nearly every business function involving payments.
How does the ACH network work?
The ACH network is a secure system managed by Nacha. Banks submit payment files in batches, which are then processed and routed to the appropriate institutions via an ACH operator.
Are ACH payments secure?
Yes. ACH payments are protected by encryption and strict compliance protocols. When paired with automation tools, they offer one of the most secure possible methods for transferring funds.
How can automation help streamline ACH payments?
Automation minimizes human error, shortens approval cycles, and centralizes payment workflows. ACH also streamlines the collection of bank account and routing information, enables secure setup of recurring credit or debit payments, and improves visibility into payment status, helping teams forecast cash flow and reduce late payments.
What are the standard processing times for ACH payments?
Most ACH payments settle in 1–2 business days. Same-day ACH is also available for an additional fee and offers faster processing for urgent expenses.
What is the cost of accepting ACH payments?
ACH payments cost significantly less than wires or card transactions, usually $0.20 to $1.50 each, making ACH B2B payments an economical choice for most businesses.
How do ACH payments differ from wire transfers?
Wire transfers are immediate, costly, and generally irreversible. ACH payments are more cost-effective and offer greater flexibility for recurring or scheduled transfers.
Are ACH payments the same as direct deposit or EFT?
ACH is a form of Electronic Funds Transfer (EFT). Direct deposit and direct payment are specific types of ACH transactions.